Loan pledges are binding

HB writes: A company director signed the standard bank guarantee form for a company´s debt obligation, without the bank explaining the provisions to him, or him seeking legal advice and there was no registration at Companies House. Also, another company has guaranteed the company´s obligation to the bank. What happens if the company defaults?

Answer

Whether a director can claim not to be bound by a guarantee depends on the circumstances. It is unlikely that a claim could be resisted except by a non-executive or someone who had no knowledge of the company´s affairs, or was a spouse having no business knowledge, and the other spouse had arranged the finance. A company giving a guarantee for another company can claim it had no commercial benefit by giving the guarantee, but this is hard to do if it is a subsidiary or has a financial or commercial interest in the company borrowing the money. Subject to that the bank can enforce its rights against a guaranteeing company as if it had borrowed the money. The bank could appoint a receiver to the borrowing company and the guaranteeing company and the receiver would then raise all he could from the borrowing company´s assets. This may not be sufficient to repay the bank, thus leaving the guaranteeing company without any sanction against the borrowing company. Equally, anyone called upon to pay under his guarantee would be in a weak position and would not be able to claim any money from the company as a creditor until the bank had been paid in full.